DIVERGENCE TRADING SETUPS SUMMARY

Classic Bearish - HH stock index price, LH indicator - Indicates underlying weakness of a stock indices trend - Warning of a possible change in the stock indices trend from up to down.

Classic Bullish - LL stock index price, HL indicator - Indicates underlying weakness of a stock indices trend - Warning of a possible change in the stock indices trend from down to up.

Hidden Bearish - LH stock index price, HH indicator - Indicates underlying strength of a stock indices trend - Mainly found during corrective rallies in a downward stock index trend.

Hidden Bullish - HL stock index price, LL indicator - Indicates underlying strength of a stock indices trend - Occurs mainly during corrective declines in an upward stock index trend.

Illustrations of the divergence terms:

M-shapes dealing with stock index price highs

M-shapes

W-shapes dealing with stock index price lows

W-shapes

These are the shapes to look for when looking for when using these stock indices setups.

One of the best indicator for this stock indices setup is the MACD Stock Indices Indicator - as a stock index trading signal MACD divergence is a setup to enter a trade. But as with any signal there are certain precautions that have to be observed to make this stock indices signal a setup. Getting straight in to a trade as soon as you see this stock indices setup is not the best strategy. This setup should be used in combination with another technical indicator to confirm the direction of the stock index trend. A good system to combine with is the moving average crossover system.

Be aware this stock indices setup on a smaller time frame is not so significant. When divergence is seen on a 15 minute chart it may or may not be very important as compared to the 4 hour chart time frame on MetaTrader 4 platform.

If seen on a 60 minute chart, 4 hour chart, or daily chart time frame, then start looking for other factors to indicate when the stock index price may react to the divergence.

This brings us to a key point when using this stock indices signal to enter a trade: on a higher time frame MACD divergence can be a fairly reliable indicator of a change in stock index price direction. However, the big question is: WHEN? That is why getting straight in to a trade as soon as you see this stock indices setup is not always the best strategy.

Many investors get caught out by entering the stock indices market too soon when they see MACD divergence. In many cases, stock index price has still got some momentum to continue in the current direction. The investor who has jumped in too soon can only stare at the screen in dismay as stock index price shoots through his stop loss taking him out.

If you simply look for this stock indices setup without any other considerations you will not be aligning yourself with the best odds, so to increase the odds of making a successful trade you should also look at other factors, specifically other indicators.

What other factors should you consider when using this stock indices setup?

1. Support, Resistance and Fibonacci levels on higher time frames

Another way to greatly increase the odds of a winning trade is to observe the higher chart time frames before opening an order based on the lower time frames.

If you observe that the hourly, 4 hour or daily Stock Indices Trading chart has met a major resistance, support or Fibonacci level then the probability of a successful trade based on divergence on a lower time frame at this point increases.

2. Reward to risk ratio

And finally, when looking for divergence, it is very important that you enter the trade correctly, so that you have a good risk/reward ratio and only open stock indices transactions that have more profit potential than what you are risking. If you understand how to enter a transaction properly, you can measure your risk/reward before you open a transaction. That way, you can only choose to open orders that offer a favorable ratio.

Finally, when used correctly and combined with other technical indicators to confirm this stock indices signal, divergence setup can offer huge profit potential.